Financing India’s ports has been challenging because of several factors, both inherent to the sector as well as to policy and financing regulatory environment. The government failed in its maiden attempt to raise bonds, and an extended timeline in the endeavour is underway. How can Indian ports hope to attract both debt and equity to help them grow? Our experts tell us.
Experts:
DT Joseph, Former Secretary, Union Ministry of Shipping.
KG Nath, Financial Advisor & Chief Accounts Officer, Cochin Port Trust.
Vijay Puri, Manager, Forsenia Engineering Pvt Ltd, which represents Sennebogen Maschinenfabrik GmbH, Germany, manufacturers of break bulk handling equipment.
Although State Maritime Boards are being established, many maritime states may be planning so much capacity that in the absence of thriving Export Oriented Zones in the catchment areas, viability is poised to be questioned. Your thoughts.
Joseph
Export Zones are not the only catchment areas for ports. If a port is properly located and has a hinterland that either makes or consumes international goods that use marine transport in sufficient quantities, such a port can be successful. However, there is no doubt that an export zone and a port are symbiotic establishments. Both can help each other thrive.
Puri
The country has to expand its international trade by many times. The existing ports are already overcrowded. Hence new ports are the need of the hour. It is possible that for a short while there may be over capacity at some ports but eventually there will always be demand for more ports.
Would it be a good idea for Special Economic Zones (SEZs) and / or their investors to also invest equity in ports?
Joseph
It is a good idea to have more and more SEZs to come within and around the ports. We should actively encourage investors and entrepreneurs to invest in ports as such, and wherever possible around the ports. However, in spite of the government’s SEZ and Free Trade Warehousing Zone (FTWZ) policy, we have not seen their extensive development near ports. Perhaps the reasons for this are difficulties in land acquisition and implementation of the policy.
Puri
Since development of ports and SEZs are interlinked it would be a good idea for them to have common investors. It could lead to balanced development.
Given that ports are poised for a massive capacity addition (and not enough on the infrastructure / connectivity side), what issues are brewing on the finance side of the equation?
Joseph
Banks and financial institutions have not shown adequate response to financing the port sector in India. Akin to the SCICI Fund, which helped shipping grow in the 1980s and 1990s, we now require a dedicated port development fund that can trigger visibility and push banks and other lenders to compete for financing the ports at a time when the port sector is dynamic.
Nath
This can be looked into different alternatives, because both major (Centre-owned, Port Trust-admiÂnistered) ports and non-major (states-, private- or PPP-governed) ports co-exist. Most of the major ports are flooded with funds because they have large surplus and accumulated reserves. Currently, the government is insisting that every new project should take place through PPP, whereby the port investment is negligible. Most of the investments will come from the private sector. In the case of ICTT Vallarpadam, DP World invested Rs 1,300 crore at the first phase for the construction of the terminal, while the [central] govÂernment has spent money for the connectivity and capital dredging. Rail connectivity was executed by Rail Vikas Nigam Limited (RVNL) and funded by the Ministry of Shipping.
Now, Cochin Port Trust has also invited Expressions of Interest from private players for setting up a bulk terminal in PPP. At present, the ministry has about 42 projects and the PMO is closely monitoring the activities. Every month a review meeting at the Joint secretary level and a three-monthly meeting with Shipping Secretary ensure continual updates and decisions. Last month, we had a meeting in Goa where the shipping minister reviewed the cases of three ports, New Mangalore, Cochin and Mormugao.
Puri
With massive expansion and slowdown in international trade there is bound to be mismatch. In the short term there could be constraints on the revenue side while the interest on capital investment and expenses would drain the resources. However, with judicious investment decisions and proper financial planning the ports can get over this temporary phase.
What are the factors governing those issues?
Joseph
Delay in taking decisions is a major factor–on the part of the ports themselves, the central and state governments. Other important issues include banks appraisal not being completed in time, and lack of adequately trained persons in all aspects of port devÂelopment and marketing. Connectivity to the areas of cargo generation should be planned in advanced, and pursued relentlessly.
Lack of supporting infrastructure: While allowing goods and commerce to reach their eventual inland destination, ports must be well connected to the road and rail infrastructure of the nation. Often this conÂnectivity is not there, resulting in lenders getting nervÂous about the success of the project.
Litigation: Many port projects are delayed these days due to litigation, which either occurs after bidding–when the bidding process is challenged by one or more of the bidders in the race–or even before the project goes to bid, as it happened in the cases of JNPT and Ennore. Court challenges have delayed port projects for three to five years.
Puri
Ports have to make judicious investment decisions with long term investments at lowest interests. They have to go for most efficient loading and unloading port machines to enable fast turnaround of ships leading to larger turnover.
What is the critically important way to solve the financing issue in ports?
Joseph
Sufficient training for banks and financial instituÂtions is required to understand relevant issues to port financing. Preparation of database is important to give proper idea of risk and return for investment in ports. Surety of maritime policy relating to port concession, and to tariff is also an important factor. Frequent policy changes should not be allowed. Changes should be
with retrosÂpective effect.
It seems to be difficult to get pure non-recourse financing in India. Much of what we see is limited recourse financing. This results in difficulties in sponsors providing various undertakings or guaranties which they find difficult to do and also limits their investment ability in other projects. Complete non-recourse finÂancing needs lenders to be much more sophisticated and have a much better understanding of the sector. With better training and more experience and if there is a desire to provide completely non-recourse finance, we should not have any difficulty in developing this expertise. If we do, it will make financing of port projects easier.
Nath
Funds can be raised by the financial inflow without any need of external finance. So fundraising is not a major constraint at the moment as far as major ports are concerned. Even in the last Budget, the government has allocated Rs 5,000 crore for the ports sector. The ports can also raise fund through issuing infrastructure bonds. Recently the government has given the go ahead to Jawaharlal Nehru, Mumbai and Ennore ports to raise funds. Indeed, all the terminals are operated by private players and every month they get Rs 100 crore or Rs 200 crore through revenue share.
Puri
An initiative by the central and state governments to enable the ports to raise capital or loans at judicious rates and support for increase in international trade are important.
How has the bond market developed in the ports sector?
Joseph
There is no bond market at present in India for port financing. Ministry of Shipping has failed to raise money through this route and has sought an extension over the next year.
Puri
The Ministry needs to rethink and work out an attractive package to raise finance for the ports. Many developing countries have followed the bond route successfully and India should learn from their experience. The government could appoint an independent body to raise finances nationally and internationally for the port development.
There has been a fair amount of interest among international ports to participate in Indian ports. How would they react to financial returns in the current scenario? Would international players be able to raise funds to run Indian ports?
Joseph
International port operators remain very interested in Indian port investments like the DP World, PSA etc. Many of them have set up offices in India. However, there are some reasons that reduce the attractiveness of Indian port projects.
High bids: For some reason, bids in Indian port projects have been coming in at levels that are far too high. Bids have been received at above 50 per cent of gross revenues. At these levels returns to investors will be very low and it brings into serious question the economic rationale of the bidding. Authorities must find a way to reduce bids to sustainable levels.
Depreciation of the Rupee: A depreciating Rupee reduces returns to international investors. While this may be a temporary phenomenon, over the last year the Rupee has depreciated considerably and investors take this into account when deciding on bidding for projects.
Policy changes: Sudden policy changes are anathema to all investors. A policy may be bad or good, but an element that is fundamental to creating a good investment climate is continuity in policy. Investors do not like an environment that is not stable.
Nath
There are certain concerns raised by the private operators now. Recently, the Tariff Authority for Major Ports (TAMP) has slashed their tariff which has put the private operators in difficulty. These players are working in a much more efficient way than what we have experienced so far. And they have a much more return than we expected. So recently instead of a hike what they had asked for, the charges are slashed by 45-46 per cent which will eat their earnings. This is the case of the private terminals operated at major ports.
But if you look at the non-major ports, they have no control over prices. They can fix their prices, extend concession and attract more cargo. Non-major ports in Gujarat and such places are thriving and are virtually eating the chunk of the major ports’ business. There is a basic issue of how to regulate them. On the one hand, we have a number of minor ports or non-major ports where there is no tariff restriction. On the other, there are some major ports whose tariffs are controlled and regulated by TAMP. So even though foreign players are interested in terminal projects here, they will be inteÂrested in non-major ports only. Also, state governments are helpful for the investment of foreign players in port projects or through tie-up with Indian companies.
Puri
We should be open to investments from all sides for development. International ports would not only bring in the funds but will also transfer latest technology. This could help the newer ports to compete with larger existing ports.
Is there a TAMP angle to the financing issue? (Tariffs were reduced earlier this year).
Joseph
The last few years have proved that TAMP is perÂhaps a large disincentive to investment in Indian ports. There are two reasons why minor ports have grown at a much better rate than major ports: The absence of TAMP in minor ports and better port policy in some states that has encouraged the development of minor ports.
Ports, like all core infrastructure, are characterised by high capital investment, long gestation period and low returns. In such a scenario if an investor is confronÂted with the likelihood that, because of TAMP his efforts in improving the efficiency of his investment will not be suitably rewarded, he is bound to be disÂcouraged from making the investment.
Puri
Tariffs have to be regulated but must be realistic. It has to be understood that ports have to generate a surÂplus to enable them to pay the investor, to modernise, to develop and expand.
Should a regulator be installed for ports? How will this help with financing issues?
Joseph
Yes, I believe that a Regulator is necessary. It has to be much more comprehensive than the present tariff-setting authority. In the immediate perspective, it may not be of help in financing the ports. But combined with improvement in speeding up all types of judicial processes, it would be of great help in the long run. Policy issues such as IIFCL coming in only after the Banks have done the scrutiny, and taken the risk are leading to frustration for the larger banks. These deserve to be taken up by Regulator and the Union Ministry of Shipping.
Nath
The only issue is how control can be exercised. Because major ports are under central government and non-major ports under state maritime boards. So there needs to be some transparency in fixing the rates etc. The issue is how these entities can be brought under one umbrella, which is a difficult proposal.
TERI has carried out some studies in terms of revising the tariff regulations and they have submitted the report to the government. Meanwhile the government was considering a total revamp of the regulatory body through another legislation which was also not happened.
Puri
For a composite and equitable development of ports, a regulator would be needed. However the regulator should be there to solve the problems and must not become a barrier itself.
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